Friday, June 8, 2018

Submerging Markets

Slowly dropping like flies. A few weeks ago it was Turkey, now Brazil. There were many gurus who touted emerging markets earlier this year because they were cheap historically compared to developed markets, especially US. Now they are even cheaper. There is no guarantee that past performance is repeated in the future. There is no law that past valuations should be maintained in the future. The linchpin for all this weakness is China. When China slows down, its a domino effect that slows down the other emerging markets. It is not really a dollar story, because the dollar was much stronger in late 2016 and China and the other emerging market economies were stronger than they are now. You can't blame the Fed for this one. You can blame China for not taking control of their debt bubble sooner and instead have built up a monster that needs more and more debt just to keep financial stability.

In the meantime, until yesterday, the US markets didn't care, as the FOMO trade is back on and VIX is back under 12. With the ECB signaling that they want to end QE this year, that is going to allow the Fed to tighten a bit more than before because the dollar will weaken with ECB being marginally more hawkish. The monetary tightening in the US and the reluctance to ease more in the other developed economies will keep a lid on any equity exuberance over the coming months. We have reached a level where the risk/reward for a short on the S&P is now very favorable. Anything near 2780 can risk up to 2830 for a target of 2600. That is 50 point risk for 180 point gain.

I would like to wait for the FOMC meeting to pass by before putting on the shorts. It could be the final hurdle that the bulls clear before they go all in. They are almost there, it will just take a few more days.

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